Note 10: Incentive Compensation Plans

At December 31, 2013, we had three incentive compensation plans that are described below:

Omnibus Incentive Plan

We maintain an Omnibus Incentive Plan (“OIP”) which was approved by our stockholders in May 2012. The OIP replaced the Stock Incentive Plan, which was maintained until the approval of the OIP. The OIP permits the issuance of stock options, restricted stock, restricted stock units and other stock-based awards to non-employee directors, other than those directors owning more than 5% of our outstanding common stock, consultants, officers and other key employees who are expected to contribute to our future growth and success. An aggregate of 2,150,000 shares of common stock were authorized for issuance under the OIP, of which 565,818 were available for grant at December 31, 2013.

Stock Options

The option price for options granted under the OIP is equal to the fair market value of the common stock at the date of grant. Options granted to non-employee directors vest over a three-year period, and options granted to employees vest over a four-year period. All options under the OIP will expire no later than ten years after the grant date. Forfeited options may be reissued and are included in the amount available for grants.

A summary of stock option activity as of and for the years ended December 31, 2013, 2012 and 2011 is presented below:



	Non-vested
	stock options			Stock options
	outstanding			outstanding
		Weighted-			Weighted-
		average			average
	Number	grant-date		Number	exercise
	of shares	fair value		of shares	price
Balance, January 1, 2011	281,975	$	12.59	605,600	$	22.02
Stock options granted	146,000		21.27	146,000		36.33
Stock options exercised				(27,500)		13.64
Stock options vested	(142,050)		14.78
Stock options forfeited	(1,000)		16.08	(4,000)		32.07

Balance, December 31, 2011	284,925		15.56	720,100		25.19
Stock options granted	40,000		20.60	40,000		36.66
Stock options exercised				(72,050)		18.06
Stock options vested	(125,071)		15.31
Stock options forfeited	(41,000)		16.68	(41,000)		27.84

Balance, December 31, 2012	158,854		18.81	647,050		26.52
Stock options granted	142,000		18.02	142,000		32.72
Stock options exercised				(55,625)		15.25
Stock options vested	(78,958)		18.01
Stock options forfeited	(20,740)		15.87	(26,500)		27.67

Balance, December 31, 2013	201,156	$	18.83	706,925	$	28.61

The following table summarizes information about stock options outstanding at December 31, 2013:



	Stock options outstanding				Stock options exercisable
		Weighted-
		average
		remaining		Weighted-			Weighted-
		years		average			average
	Number	contractual		exercise	Number		exercise
Range of exercise prices	of shares	life		price	of shares		price
$9.28 to $18.15	119,350	3.2	$	14.45	119,350	$	14.45
$18.49 to $27.29	137,525	5.9		20.91	129,369		20.78
$27.54 to $32.78	183,500	7.9		32.08	68,243		31.85
$33.25 to $35.70	125,000	6.3		34.72	100,278		34.64
$36.15 to $42.50	141,550	7.0		38.13	88,529		38.33

Stock outstanding at end of year	706,925	6.3	$	28.61	505,769	$	26.60

Stock options exercisable at end of year	505,769	5.1

Proceeds from stock option exercises totaled $848,000, $1.3 million and $375,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Shares issued in connection with stock option exercises are issued from available authorized shares.

Based upon the closing stock price of $36.06 at December 31, 2013, the aggregate intrinsic value of outstanding in-the-money stock options and outstanding exercisable in-the-money stock options was $5.6 million and $5.0 million, respectively. Intrinsic value of stock options is calculated as the amount by which the market price of our common stock exceeds the exercise price of the options. The aggregate intrinsic value of stock options exercised for the years ended December 31, 2013, 2012 and 2011 was $929,000, $1.6 million and $549,000, respectively. The total fair value of stock option awards vested was $1.4 million, $1.5 million and $2.1 million during the years ended December 31, 2013, 2012 and 2011, respectively.

Share-based compensation to employees and directors is recognized as compensation expense in the consolidated statements of operations based on the stock options fair values on the measurement date, which is the date of the grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. The compensation expense recognized and its related tax effects are included in additional paid-in capital.

Share-based compensation expense related to stock options totaled $1.5 million, $1.6 million and $1.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Share-based compensation expense is recognized ratably over the requisite service period for all stock option awards. Unrecognized share-based compensation expense related to non-vested stock option awards totaled $3.8 million at December 31, 2013. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.9 years.

The fair value of our stock options granted is estimated on the measurement date, which is the date of grant. We use the Black-Scholes option-pricing model. Our determination of fair value of stock option awards on the date of grant is affected by our stock price as well as assumptions regarding our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

The assumptions used to determine the fair value of stock options granted are detailed in the table below:



	2013	2012	2011
Risk-free interest rate	1.02% to 2.14%	0.80% to 1.10%	1.23% to 2.66%
Dividend yield	0.0%	0.0%	0.0%
Expected market price volatility	57% to 60%	59% to 62%	55% to 62%
Weighted-average expected market price volatility	58.1%	61.8%	56.1%
Expected term	5.4 to 7.5 years	6.0 to 6.3 years	6.0 to 7.9 years

The risk-free interest rate was developed using the U.S. Treasury yield curve for periods equal to the expected life of the stock options at the grant date. No dividend yield was assumed because we do not pay cash dividends on common stock and currently have no plans to pay a dividend. Expected volatility is based on the long-term historical volatility (estimated over a period equal to the expected term of the stock options) of our common stock. In estimating the fair value of stock options under the Black-Scholes option-pricing model, separate groups of employees that have similar historical exercise behavior are considered separately. The expected term of options granted represents the period of time that options granted are expected to be outstanding.

Restricted Stock

During the year ended December 31, 2012, we granted 35,000 time-based shares of restricted common stock to certain employees. The fair value of the non-vested time-based restricted common stock awards was calculated using the market value of the stock on the date of issuance, which was $35.26. During the year ended December 31, 2013, 3,000 of these restricted shares were forfeited.

Share-based compensation expense related to restricted stock totaled $339,000 and $34,000 for the years ended December 31, 2013 and 2012, respectively. We did not incur any share-based compensation expense from restricted shares during 2011. As of December 31, 2013, total unrecognized compensation cost related to non-vested time-based restricted common stock awards was $861,000. That cost is expected to be recognized over a weighted-average period of 1.9 years.

Employee Stock Purchase Plan

In May 2012, an amendment to the 1996 Employee Stock Purchase Plan (the “Plan”) was approved by our stockholders. The amendment increased the number of shares authorized for issuance under the Plan by 50,000 to an aggregate 200,000 shares of common stock to our full-time employees, nearly all of whom are eligible to participate. Under the terms of the Plan, employees can choose as of January 1 and July 1 of each year to have up to 10% of their total earnings withheld to purchase up to 100 shares of our common stock each six-month period. The purchase price of the stock is 85% of the lower of its beginning-of-the-period or end-of-the-period market prices. At December 31, 2013, we have issued 151,581 shares of common stock since the Plan’s inception.

Cash Incentive Plans

We have a variable compensation plan covering certain key executives and employees and profit-sharing plans and a key performance plan that cover the remaining employees. The profit-sharing plans provide for the sharing of pre-tax profits in excess of specified amounts at our Bridgeville, Dunkirk and Titusville facilities. The key performance plan provides a cash incentive for achieving certain performance metrics at our North Jackson facility. For the years ended December 31, 2013, 2012 and 2011, we expensed $1.0 million, $4.0 million and $6.8 million, respectively, under these cash incentive plans of which $576,000, $3.9 million and $4.5 million, respectively was included as a component of cost of products sold while the remainder is included in selling and administrative expense. At December 31, 2013 and 2012, we had liabilities of $530,000 and $2.0 million, respectively, as a component of accrued employment costs on our consolidated balance sheets related to these cash incentive plans.